The US dollar was higher across the board against major pairs last week. The better than expected GDP data with the greenback rising, even as the Fed will be on deck during the week to restart an easing monetary policy cycle with an interest rate cut. 
The market has already priced in a 25 basis point rate cut but given the strong fundamental data of late a 50 basis points slash is looking unlikely.
The week will be packed to the brim with central banks: Bank of Japan (BOJ), Bank of England (BoE) and the Federal Open Market Committee (FOMC) and economic data: US consumer confidence, Chinese manufacturing PMIs and the release of employment data in the US.
The Federal Open Market Committee (FOMC) will wrap its two-day meeting on July 31 with the publication of the interest rate statement at 2:00 pm EDT to be followed by a press conference hosted by Fed Chair Jerome Powell at 2:30 pm EDT.
The actions of the Fed could be limited by improving economic indicators, but Powell is expected to continue a dovish rhetoric line that puts downward pressure on the USD.
The Fed is heavily anticipated to make the first interest rate cut of a new monetary policy easing cycle on July 31.
The improved GDP data does not change the forecast on that, but it does reduce the probability of a potential 50 basis points, and the number of rate cuts for the rest of 2019.
OIL
Oil prices ended last week higher as the surprise resilience of the US GDP and the Middle East tensions continue as the Strait of Hormuz is in the eye of the supply storm. The US economy was expected to slow down, and it did, but thanks to consumer spending it managed to do so at a lower rate than anticipated.
The U.S. Federal Reserve is ready to pull the trigger on an interest rate cut this week to boost growth and avoid further deceleration. American consumers have been for the most part spared of the US-China tariff war, which is why is telling that business spending dropped. A prolonged trade war could reach consumers this year if Beijing and Washington don’t reach an agreement.
The US has kept the expectations muted and the best case scenario is a reset to where talks left off in May. The US trade team is headed to China this week and energy prices will reflect the tone of the comments as the meeting gets underway.
GOLD
The Fed cutting the benchmark rate by 25 basis points has been fully priced in, so the surprise upside to the GDP data in the US boosted the dollar and made the case that the central bank might not need to cut or do so with less urgency for the rest of the year.
The 50 basis points cut scenario is looking more unlikely at this point, despite the White House comments on lower rates. A deep cut by the Fed would boost gold and provide the dovish downward push from central banks that the ECB failed to deliver.
Gold lost some momentum as the ECB did not go full dove as President Mario Draghi did not offer a sequel of his “whatever it takes” comments when he took the leadership of the central bank, this time around he is leaving the action for his last monetary policy meeting in September before handing over the reins to Lagarde.
A 25 basis points cut by the Fed following a more cautious approach could lead to downward pressure for the yellow metal with the $1,400 level under threat as strong US economic indicators have reinforced the strength of the dollar.
EURO
The EUR/USD lost 0.84 percent in the last five trading sessions. The single currency is trading at 1.1126 and is the second major currency that depreciated less versus the dollar. The European Central Bank (ECB) held its monetary policy meeting on Thursday with anticipation of stronger dovish rhetoric and a possible interest rate cut, putting the benchmark rate deeper into negative territory.
ECB President Mario Draghi laid the groundwork for further easing in the next meeting to take place in September, but despite hitting all the right dovish notes, like the overuse of “worse” in describing the outlook for manufacturing and services did not go dovish enough for the market with the euro bouncing back with every answer the ECB chief gave to reporters.
Draghi will step down from the ECB in October and at this point looks to keep the central bank steady, ahead of the change in leadership. Former IMF chief Christine Lagarde will take the reins of the ECB, but only after Mario Draghi takes one more chance at “whatever it takes”.
Bank of Japan (BOJ)
The BOJ is in the same boat as the ECB. There is a small probability of adding more stimulus in July or wait until the effects of the Fed rate cut trickle down. The JPY has risen both due to the safe haven appetite and the Fed’s plans to cut interest rates in 2019.
A surprise rise in domestic demand has offset the drop in exports, but it is hard to depend on Japanese consumers finally stepping up against the backdrop of rate cuts from other major central banks.
The BOJ is expected to tweak the guidance and be vigilant of market conditions before adding more stimulus.
Federal Open Market Committee (FOMC)
Financial news services are conducting polls where economists and analysts are putting down a 25 basis points cut as the most likely outcome at the end of the two-day FOMC meeting. The market could still read that as disappointing given the dovish turn of the Fed since January.
Fed members have talked down the probability of a 50 basis points as they want to stress the central bank is playing the long game. The press conference will be key as Fed Chair will get the last word on how dovish the central bank really is about the economy as the US will be back in talking terms with China on trade.
The US-China trade war is the biggest headwind for the Fed, but in the background the White House has been on a constant campaign to get lower rates. A deal with China might be reached, but the Trump administration will continue to harp about lower rates.
Bank of England (BoE)
As Boris Johnson takes over from Theresa May, the BoE is under market pressure to cut rates. A no-deal Brexit is back on the table with Johnson at the helm, but even then, the BoE’s Chief Economist says it’s not an automatic rate cut.
The central bank would like to see a short economic downturn in order to act. Holding rates unchanged until there is a reason to change them might sound like simple sound advice, but this is the bigger question facing central banks. What happens if by waiting they add to the stress of the economy and worsens the outcome?
Mark Carney’s term will finish in January 2020 leaving the rockstar central banker plenty of time to influence monetary policy and respond to a crisis if needed. The market has lost some trust in the BoE as economic forecasts, in particular inflation have recorded big misses. This time around by sticking to its economic guns, the BoE sees a rate hike more likely than a cut, even as other major central banks have joined the dovish choir.
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